2.3 The Commonwealth’s broader role in infrastructure

Consistent with its Terms of Reference to identify other matters that should be brought to the Government’s attention, the Commission considers it appropriate to outline views on the Commonwealth’s broader role in infrastructure.

As highlighted above the Commonwealth owns only a small proportion of Australia’s infrastructure. However, it has significant regulatory, coordination and funding responsibilities.

For example, while the Commonwealth has no explicit powers in relation to the planning and construction of roads, the national economy is best served by a safe and efficient national highway and land transport network.

However, consistent with the discussion on the Federation in its Phase One Report, the Commission maintains that decisions on policy and service delivery should be devolved to the level of government closest to the people receiving the services. This recognises that sub-national governments are likely to have greater knowledge of the needs of their citizens.

State and local governments are best placed to identify the infrastructure projects and requirements that are most needed by local communities. They are also best placed to identify projects that provide an appropriate fit with the ongoing development of major urban areas.

The States should retain this responsibility. This would ensure that accountability for funding, providing and maintaining infrastructure is not clouded by a lack of clarity around who does what when it comes to infrastructure.

There is, however, a role for the Commonwealth to play in the coordination of infrastructure development of national importance.

Economic efficiency is more likely to be achieved if analysis of national networks is undertaken at a national level and decisions coordinated across levels of government, while recognising the need to respect the sovereignty of States in their own sphere.

If Australia’s cities and regions are to be more liveable, productive and sustainable then the provision of infrastructure must keep pace with population growth. Alongside investment in new infrastructure, maintenance of existing assets is fundamental, particularly given growth in major metropolitan centres, the increasing intensity of motor vehicle use and a growing freight task.

With budgets constrained, Australia’s governments face a significant challenge to pay for future public infrastructure while at the same time meeting rising community expectations.

The cost and complexity of infrastructure has also increased rapidly in recent years, as much infrastructure expansion occurs in more densely populated metropolitan areas where development costs can be high.

Environmental and occupational health and safety regulations have significantly increased the cost of infrastructure projects (for example due to lengthy and overly complex approvals processes).

Competition for resources arising from the investment phase of the resource boom has also increased costs – although this pressure may be easing. Labour market re‑regulation has also added to costs.

Whilst recognising the primacy of the States in this sphere, it is also necessary to consider the wider context in which the Commonwealth promotes the development of infrastructure. This includes three key areas: its role in nationally significant infrastructure development; the effect of Commonwealth regulation on the development of private sector infrastructure; and the funding it provides to State and local governments.

The Commission of Audit acknowledges that the Productivity Commission is currently undertaking a broad-ranging inquiry into public infrastructure, with a focus on its provision, funding and financing and the scope for reducing associated costs.

The Productivity Commission is also examining a number of areas related to the Commission’s work, including the roles and relationships between the various levels of government and the private sector, user charging and the impact of various funding and financing mechanisms on the Commonwealth Budget.

Commonwealth responsibilities

Commonwealth role in nationally significant infrastructure

While the States are best placed to make decisions and deliver infrastructure projects most needed by local communities, there is a role for the Commonwealth to play in the coordination of nationally significant infrastructure.

Under the Infrastructure Australia Act 2008 nationally significant infrastructure includes energy, transport, communications and water infrastructure in which investment or further investment will materially improve national productivity.

Infrastructure Australia was established to advise governments, investors and infrastructure owners on a wide range of infrastructure matters. These matters include: current and future needs and priorities relating to nationally significant infrastructure; policy, pricing and regulatory issues that may impact on the utilisation of infrastructure and options for reforms; and mechanisms for financing investment in infrastructure.

Reforms are currently before the Parliament to improve the effectiveness of Infrastructure Australia in relation to its development of strategies to unlock infrastructure bottlenecks and modernise the nation’s economic infrastructure and also to clarify its role in assisting governments focus on projects that will improve long-term productivity.

Direct Commonwealth investment in infrastructure

There will be instances when the Commonwealth decides to invest directly in, or finance, infrastructure including alongside State Governments.

For most infrastructure, the users and beneficiaries reside within a particular State, and the State Government is in the best position to assess the merits of a particular project in providing services to the local community.

In other cases, Commonwealth Government intervention may be necessary to ensure that infrastructure which provides broader economic or social benefits, but may not be commercial, is delivered.

As the Productivity Commission has noted, where public infrastructure that is of value to the community cannot be funded through user charges it may be appropriate for the government to consider bearing demand risk.

Direct charges are not practical for some types of infrastructure because it is difficult to exclude those who do not pay. Social infrastructure is another area where government funding can be appropriate due to public good characteristics, the existence of externalities or as a matter of policy to ensure equitable access to services.

The Commission considers that in all cases involving Commonwealth investment in infrastructure there needs to be transparent and rigorous cost benefit analysis.

The Productivity Commission, in its recently released draft report on Public Infrastructure, highlighted that:

The threshold step for any assessment on the merits of direct government provision of finance should focus on the underlying rationale for government involvement. Both government capital contributions and lending involve a transfer of financial costs and/or risks of a component of the financing to the taxpayer, and the first order question is whether this is warranted on public benefit grounds. To some degree, appropriate project selection and design as well as the decision on the extent of government involvement are more important than the form in which finance is provided by the government.

The National Commission of Audit notes that if an asset is one where users can be charged for the service, it should be capable generating a positive net present value using a commercial rate of return for that class of assets. If the investment is capable of generating a commercial return, then the private sector should be best placed to supply it.

Where the Commonwealth decides to directly invest in or finance infrastructure, there are a number of forms this can take – in general via the provision of capital investment or lending support. There are a range of considerations which will inform the choice of investment method, all of which involve some transfer of risk to the government.

Grant funding, which is effectively a direct subsidy, may be appropriate where a project provides net economic or social benefits but where the return on investment is not sufficient to make the project commercially viable.

Payment of a grant can limit the Commonwealth’s involvement in a project to a one-off intervention. Grant funding directly impacts on the Budget bottom line. A potential downside to providing grants is that this may provide reduced incentives to deliver an efficient outcome as support is not tied to expected returns.

The Commonwealth can also provide a contribution by taking a direct equity position in an infrastructure project (including by investing through a company structure). Where it does take an equity position, the Commonwealth should disclose the rate of return it expects to receive and how this compares to the risk adjusted rate of return that a private sector investor would need to make the same investment.

As outlined in the Commission’s Phase One Report, provided the expected return in real terms is positive, an equity investment in infrastructure will not have an impact on the Budget bottom line.

A critical aspect of the Commonwealth taking equity stakes in infrastructure is to ensure that it has considered an appropriate exit strategy.

In other circumstances the Commonwealth may provide concessional loans to a State or private sector proponent in order to lower the financing costs of a project.

However, irrespective of the form of financing support provided by the Commonwealth when it invests in infrastructure, the Commission considers that the full costs and risks to taxpayers should be transparently reported in the Budget papers.

As noted in the Commission’s Phase One Report, concessional loans and guarantees involve the transfer of substantial risks to the Commonwealth. Consistent with the Commission’s Phase One recommendations, the expected costs of loan default or of calling on guarantees should be reflected in the Budget.

Recommendation 2: Commonwealth investment in infrastructure

Quality infrastructure is important to drive productivity and economic growth. While the States are best placed to identify projects that best suit local needs, the Commonwealth has a role in coordinating nationally significant infrastructure. The Commission recommends that to the extent the Commonwealth directly invests in or finances infrastructure:

the Commonwealth only invests in infrastructure projects either alone, or jointly with the States and or the private sector, where a rigorous and transparent cost benefit analysis indicates that the project would provide substantial net benefits to the community;

the Commonwealth's contribution of finance be targeted to those projects that provide broad economic or social benefits beyond commercial returns but cannot be completely funded in the short term by user charges and would not otherwise go ahead; and

while favouring grant or equity contributions, the Commonwealth not be constrained by the form in which finance is provided other than to ensure complete transparency, including appropriate provisioning in the Budget.

Designating the National Land Transport Network

The Commonwealth has the legislative responsibility for determining what constitutes the National Land Transport Network.

This is a single integrated network of land transport linkages based on national and inter-regional transport corridors including connections through urban areas, links to ports and airports and intermodal connections.

The Minister for Infrastructure and Regional Development specifies by determination what constitutes the Network, subject to requirements of the Nation Building Program (National Land Transport) Act 2009. The most recent determination was in 2005, with the current road and rail networks reflected in Figures 2.2 and 2.3 below.

Ownership of the National Land Transport Network remains with the States and the Commonwealth contributes maintenance funding on condition that the States appropriately maintain the network and provide agreed data on the condition and use of the network and funds provided.

Road user charging

Australia has many well-developed, user-funded infrastructure networks, including power, water and telecommunications where investment decisions are mainly taken by corporate entities that manage the provision of infrastructure services under regulatory supervision.

In the case of facilities such as ports and railways that carry bulk freight, use is generally subject to third party access regulation.

In contrast, the current public road-pricing model lacks transparency and does not price the efficient use of the road network. Under this system, access to most public roads is free, with only a small number of toll roads charging for use.

For both heavy and light vehicles, costs of road use are partially recovered by the States via registration fees. The Commonwealth also imposes a fuel excise predominantly as a general revenue measure.

As noted by the Australia's Future Tax System Review and Infrastructure Partnerships Australia, the current fuel excise recovers more revenue than the funds spent on the road network by the Commonwealth.

All vehicle users pay fuel excise on each litre of fuel used. Heavy vehicles can claim a fuel tax credit against the fuel excise, but this credit is set so as to impose a Road User Charge currently around 25 cents per litre.

The Road User Charge rises each year under determinations made by the National Transport Commission. The fuel excise rate is fixed in nominal terms at 38.1 cents per litre. In the absence of an increase to the fuel excise rate, the Road User Charge for heavy vehicles is likely to reach the fuel excise ceiling in five to seven years.

This system of cost recovery is not efficient and is not fair.

Current arrangements do not reflect the different costs imposed by type of vehicle, time and location of road use. Instead, for the same vehicle use, contributions to road costs depend on relative fuel efficiency.

While there can be good reasons to provide incentives for more fuel efficient vehicles, the system does not provide similar incentives to avoid contributing to congestion and road damage. Light vehicles pay more per kilometre travelled than heavy vehicles yet impose fewer costs on the road network.

Road related fees and charges are collected by two levels of government while investment in maintenance, renewal and expansion is spread across all three tiers of government. This results in a complex system that lacks transparency and does not provide a clear link between revenue and expenditure on the transport network.

This problem is particularly acute for heavy vehicles, which impose greater wear and tear on roads and face access issues related to this greater level of damage, both of which impact on road freight productivity.

For heavy vehicles, current charges are based on averages rather than reflecting each operator's actual use of the network. Heavy vehicle road users are consequently provided with no price signals related to their use of the road network. This results in a lack of efficiency in vehicle usage.

As road providers are not directly compensated for the costs imposed for heavy vehicles, they do not see heavy vehicle users as clients and have no incentives to allow heavy vehicle access. This problem has a greater impact in relation to local roads, which comprise 80 per cent of the road network.

Congestion on public roads remains a major community concern, resulting in strong pressure to expand metropolitan road networks. However, increasing congestion is not a result of a lack of investment but rather a failure to align user-demand with price signals. User charging would introduce price signals that should lead to better use and investment in transport infrastructure.

Accordingly, the Commission considers there is significant scope for increased user charging to provide price signals and enhance the efficiency of transport infrastructure markets. User charging also has the potential to help fund infrastructure in an efficient and equitable way.

It also helps ensure that users who derive the direct benefits from infrastructure, such as a new motorway or rail line, make a contribution to its provision, maintenance and operation.

Work is currently occurring under the Council of Australian Governments' Standing Council on Transport Infrastructure to improve the productivity of the heavy vehicle sector and address the problems outlined above. This work recognises that the current system of providing infrastructure to support heavy vehicle road access involves an inefficient, inequitable and unsustainable road charging regime.

Under the reform proposal, the tax-based charge for heavy vehicle road use would be replaced with a fee for service charge. This charge would be set to reflect the cost and use of the heavy vehicle road service.

This would be accompanied by a new national system for collecting revenue through 'mass-distance-location' charging of heavy vehicles using currently available technology. This system would provide better signals to heavy vehicle operators about the types of vehicle they use and the roads they use them on, and to road operators about the type of pavements that should be built, resulting in more efficient investment in, and use of, the road network.

The Commission considers that these heavy vehicle reforms could, over time, be broadened to cover all road users. The most important reform is to introduce more effective price signals that better reflect the impact of road usage by different types of vehicles.

The community has come to accept the need for charging in the energy, communications and water sectors, and governments should consider such a user charging approach for parts of the road network and for time-of-day surcharges. The Commission notes that recently road user groups, including the major automobile associations, have endorsed the development of a more transparent and efficient user charging model for all road users.

Recommendation 3: Road user charging

There is significant scope to expand road user charging, particularly for heavy vehicles, to reduce congestion and increase funding from those that directly benefit from road use.

The Commission recommends that the Commonwealth work with the States to develop mass-distance-location charging reforms. Over time, these reforms should be extended to universal road user charging for all vehicles to the maximum extent possible.

Commonwealth regulatory responsibilities

The Commonwealth performs a significant role in economic and safety regulation related to infrastructure. These public interest roles involve responsibility for statutory regulatory frameworks, and providing national leadership and harmonisation, where appropriate across jurisdictions.

Some important reforms to competition policy and infrastructure regulation in the interests of national productivity have been put in place over the past few decades.

The challenge for the Commonwealth within a tightened fiscal environment is to ensure reform continues. This includes ensuring regulatory settings are sufficiently balanced and support the best operating environment for infrastructure owners, investors and users.

Price monitoring and access regulation

Infrastructure assets are often natural monopolies – where it is more efficient for a single firm to supply a market than for multiple firms to do so. Owners of monopoly assets, including railways, ports and electricity networks, can have incentives to exercise their market power either to price their services well above costs or to prevent access by third parties to the asset.

Governments will typically deal with these issues through regulatory interventions including price regulation, price monitoring or overseeing prices charged through an access regime.

The Competition and Consumer Act 2010 and the Competition Principles Agreement signed by the Commonwealth and the States establishes the Commonwealth’s leadership role in access regulation.

There are a number of regulators and decision makers in the national regime, including the National Competition Council, which can recommend the designated minister declare an infrastructure service, giving parties the right to negotiate access arrangements. If the parties cannot agree, the Australian Competition and Consumer Commission can be called in to arbitrate and make a determination on terms and conditions of access. It can also accept undertakings from infrastructure providers.

The Australian Competition and Consumer Commission also has powers to monitor prices, usually following a direction from the government. Infrastructure-related markets currently subject to price monitoring include airport services and telecommunications, with a number of States also monitoring or regulating prices of certain infrastructure services.

Since its introduction, there have been a number of reviews of the National Access Regime, including Productivity Commission reviews in 2001 and 2013, and a 2005 report by the Export and Infrastructure Taskforce.

Subsequent to the earlier reviews, a number of changes have been made to the regime. In general, they have aimed to better target its use to key infrastructure and situations where access is an issue and also to streamline processes. This included the introduction of time limits for decisions to improve certainty for infrastructure investors and users.

Other changes sought by the Export and Infrastructure Taskforce, such as harmonisation of transport regulations and better coordination of infrastructure between jurisdictions, have also been progressively implemented.

As part of these reforms, in 2006, the Commonwealth and the States agreed to the Competition and Infrastructure Reform Agreement. This sets out commitments for a simpler and more consistent system for regulation of nationally significant infrastructure across jurisdictions and includes specific reforms in relation to government business entities competing with the private sector.

The Commission of Audit notes that the most recent Productivity Commission inquiry (2013) found the National Access Regime should be retained, but recommended a number of changes to improve investment and regulatory certainty and reduce costs.

The Government has indicated that it intends to respond to the inquiry’s recommendations following the Review of Competition Policy now underway.

The Commission supports this approach as a means of ensuring that changes to access matters are considered within any wider competition reforms. To the extent there are any outstanding recommendations from the Export and Infrastructure Taskforce, they should be considered as part of the Government’s response.

National heavy vehicle, rail and maritime safety regulation

The Commonwealth also has a key role in leading national reform of the regulation of heavy vehicles, rail safety and maritime safety.

Processes for implementing nationally consistent road, rail and intermodal regulatory and operational frameworks have been underway since the early 1990s and the establishment of the National Transport Commission.

This area has also been a particular recent focus of the Council of Australian Governments, which set an objective of reducing the number of regulators from 23 to three. This has the strong backing of industry.

The Commission’s Principles of Good Government emphasise that the States should be free to compete against each other, respecting regional differences. However, there are occasions, including transport regulation, where the national interest calls for a cooperative and national approach.

A National Rail Safety Regulator, a National Heavy Vehicle Regulator and a National Maritime Safety Regulator have all been established although not all States have indicated a willingness to participate in the reforms. There is also a risk that the States may attempt to circumvent the intent of the national frameworks.

The Heavy Vehicle National Law, covering all vehicles over 4.5 tonnes, commenced operation on 10 February 2014 in all States except Western Australia and the Northern Territory. Western Australia decided not to sign the Intergovernmental Agreement with the Commonwealth and the other States.

The Commission has been advised that this reflects the high proportion, around 87 per cent, of Western Australian heavy vehicle traffic that is intra-state, and consequently the relatively lower benefits this State would derive from these reforms compared to the eastern States, where there is greater inter-state road freight.

While the benefits of harmonised national heavy vehicle regulation are strong, insufficient consideration was given to implementation, with the result that there have been substantial transitional challenges, particularly in the issuing of road access permits.

Insufficient staffing, problems with the regulator’s systems and processes and an initial backlog of applications meant that there were substantial delays in the granting of permits. While temporary processing arrangements with the States have been put in place, continued Commonwealth leadership and facilitation will be required to ensure the intended benefits of the new regulatory arrangements are realised.

Reforms to transport regulation will reduce red tape for interstate operators who will no longer have to deal with multiple regulatory systems. For example there will be a ‘one-stop’ shop for heavy vehicle operators applying for roads access permits. Manufacturers of commercial vessels and heavy vehicles will also benefit from a consistent set of standards. These reforms should improve productivity for the users of infrastructure.

Shipping

Shipping plays an important part in Australia’s transport task. It carries virtually all of Australia’s exports as measured by weight, and provides some 20 per cent of Australia’s domestic freight task measured by tonne-kilometres.

However, as shown in Chart 2.1, while the volume of domestic freight has been growing steadily over the past 40 years, coastal shipping has remained largely static.

While shipping does not fit neatly into the definition of ‘infrastructure’, with the main infrastructure being the ports themselves, the Commonwealth regulates coastal shipping.

In part, the lack of growth in coastal shipping reflects the nature of the market which predominantly comprises bulk commodities moved from point to point for further processing within Australia. However, it also reflects the impact of regulatory policies.

Cabotage rules — that preserve freight routes from one Australian port to another for Australian-flagged ships — are effectively industry assistance, increasing costs and reducing competition.

In contrast, international trade is almost exclusively carried by foreign flagged ships. While these vessels are able to access coastal routes in certain circumstance, cabotage ensures a significant cost disadvantage for Australian businesses reliant on the movement of bulk commodities.

The Productivity Commission, in its recent draft report on Tasmanian Shipping and Freight, noted that Tasmania is particularly disadvantaged by coastal shipping regulation and that it should be reviewed and reformed urgently.

The Commonwealth Government has also indicated it intends to examine coastal shipping requirements.

To ensure that a more efficient coastal shipping industry, the Commission recommends cabotage be abolished.

Recommendation 4: Improving national transport regulation

An efficient and well regulated transport system is critical to the cost structure and competiveness of Australian business. The Commission recommends improving the regulation of national transport by:

ensuring that, where appropriate, national land transport regulatory reforms are fully and consistently implemented in each jurisdiction as soon as practicable; and